(June 2) Factors, like banks, try to minimize their own risks when they lend money. That’s why recourse factoring exists.

In recourse factoring, the factoring institution does not risk any bad debts because it obtains a guarantee that it can collect on the receivables it purchases. Put another way, if the debtor doesn’t pay up within certain period of time, the factor can go back to the debtor for a refund on its cash advance.

Because of produce’s perishability, recourse factoring is far more common.

In contrast, there is nonrecourse factoring, in which the factor assumes specified debt risks, such as total disappearance, but it does not insure against slow payment. Because of this, nonrecourse factoring tends to be more expensive than recourse factoring, in terms of fees and rates.

“Recourse is more common because there’s less risk, and you’re not just getting the receivable,” said Larry Meuers, a Naples-based attorney specializing in cases involving the Perishable Agricultural Commodities Act.

Nonrecourse factoring is particularly risky where produce receivables are concerned, Meuers said.

“In the produce industry, (recourse factoring) is somewhat helpful, because you always have quality problems and invoice adjustments,” he said. “So it’s very hard to say you’re paying for a $10,000 invoice and if the produce is bad, you’re only paying for a part of it. Usually, the factoring agreement doesn’t work textbook, and that’s the reason. The invoice amounts vary; there are market price adjustments; there are quality price adjustments. And, a lot of times, an invoice changes.”

Meuers said recourse factoring is analogous to buying a product with a guarantee.

“They’re saying in a way that produce is shipped with a guarantee that it’s going to be good, and if it’s not good, you’re entitled to money off,” Meuers said. “They’re saying they’re buying without recourse, but shouldn’t they have some recourse if it turns out this $10,000 invoice is not worth $10,000?”

Choosing nonrecourse or recourse factoring depends on various circumstances, according to Peacock Capital, a Los Angeles-based financial-services firm.

Recourse factoring is preferable, the company says, if the invoice seller is comfortable with the risk, because factoring fees are lower. Nonrecourse factoring, on the other hand, may be preferable to sellers willing to trade possible higher risks on non-payment for higher factoring fees.